What Your Funds Own Matters More Than Which Funds You Own

YOUR MONEY - MUTUAL FUNDS

Walking through the exhibit hall at the Schwab Institutional Investor Conference in Orlando this week was a bit like perusing the daily or weekly mutual fund tables in the paper.

There was row upon row of fund names and virtually nothing to distinguish one from another.

Oh, there was the odd hand puppet or bottle of barbecue sauce to lure the assembled crowd of financial advisers, but the overwhelming impression from this premier industry trade show is that very little separates one fund from the next.

At about 50 booths in the mammoth hall, company officials tried to tell me what made their funds unique.

Clearly, there are fine-line distinctions. But spending hours trying to divine ``the best'' choice from a group of good growth-and-income may not be the best use of your time.

That might sound like heresy coming from someone who writes about funds for a living, but it's true in the vast majority of cases. Think about a fund you did not buy, say, five years ago. This would be some fund that made your short list but got beaten out by an offering you determined was ``better.''

Without some type of extenuating circumstances, your performance most likely would not be that different had you chosen the fund you rejected.

So if the ``best available fund'' is only marginally better than the competition - another strong argument for buying index funds, by the way - investors should instead spend their time where it counts most, on asset allocation and risk tolerance.

While studies on the subject are disputed, the general consensus among experts is that the way you invest your money - the specific types of assets you own - is the critical element to determining performance.

Year-to-date, for example, a stock portfolio split 50-50 between large and small-cap stocks, as represented by the Standard & Poor's and Russell 2000 indexes, would be down about 0.5 percent. But a portfolio split between the S&P 500 and Vanguard's Total Bond Market fund is up more than 10 percent.

The difference is not just performance, but risk. The small-cap assets in the stock portfolio make for a bumpier ride, volatility that is unsuitable for some investors.

Risk tolerance is doubly critical in market conditions like those visible recently. While investors know their funds will periodically have rough patches, the summer downturn was the first time many actually saw a decline hit home. Suddenly, it was no longer a bar chart, or a dip on a line of historical returns back to 1921, but real money evaporating at a rate of a few percentage points each day.

That alone made some investors nervous about their asset allocation. Heck, advisers at the conference said the downturn is a boon to business, since it sent investors running for help.

Many of those investors wanted help in picking better funds. Those people have missed the lesson now being taught by the market: The assets your funds own are more important than which specific funds you own.